Alarmed that the programme was set to trigger an unexpected surge in the budget deficit, Prime Minister Giorgia Meloni's cabinet last week banned the sale of further tax credits, which were tied to an array of generous building promotions.

Construction companies warned that the curtailment of the incentives would damage an industry that has helped drive economic recovery following the COVID pandemic.

But the immediate concern for many firms and households is how to recover an estimated 20 billion euros of credits for work that has already been completed or committed to, but that have not been paid out.

Government ministers met banking and construction associations this week to seek to unblock the funds.

"We need to save public accounts, but we also need to protect families and businesses," Maurizio Gasparri, a senior member of the Forza Italia party, part of the ruling coalition, said on Tuesday.

The schemes, aimed at boosting the energy efficiency of Italy's drafty building stock, were launched in 2020 by the-then Prime Minister Giuseppe Conte to kick start the stalled economy.

Under the programme, homeowners could deduct the cost of the building work from their taxes over a 5-10 year period, or sell the tax credit to their builder as a form of payment. The builder could then sell it on to a bank, which would deduct the sum from its own tax bill with the state.

But the schemes, including the so-called "superbonus" where the state promised to pay out 110% of the cost of renovations, proved more popular than expected, generating an estimated 110 billion euros of work against forecasts of 72 billion euros.

This glut, along with fears of widespread fraud, led many banks last year to stop accepting credits, leaving thousands of businesses and homeowners stranded with unexpected debts.

HORROR STORIES

Alberto Pierangeli, who runs a small construction business in Rome, said he had 70,000 euros worth of credits on his books, forcing him to take out expensive bank loans to cover his costs.

"The situation clearly couldn't carry on, but we took on the credits in good faith and we need to be reimbursed," he told Reuters, warning that many firms faced bankruptcy.

Facebook support groups have popped up, telling horror stories of blocks of flats left uninhabitable after construction firms pulled out mid-way through major renovations, or of homeowners left nursing huge debts with no relief in sight.

"The state promised people that they would get their money back. They encouraged people to do this work, and then they went back on their word. It is a disaster," Pierangeli said.

Banks have said there are more tax credits in circulation than they can deduct from their own tax bills. The government has contested this, but is also looking into the idea of letting banks keep tax returns paid through their system by clients.

Ministers have also sought to reassure banks they will not be held responsible if it transpires the credits are fraudulent, generated by cowboy building firms for fictitious work.

"We want to persuade the banks and other players to take all the stranded credits," Meloni said at the weekend, defending her decision to suddenly end further payments via tax credits.

The move was triggered by an EU decision to include the tax credits in deficit calculations, potentially blowing budget plans dramatically off course.

"If we had left the superbonus as it is, we would have had no money left in the budget for anything else," Meloni said.

(Additional reporting by Alvise Armellini and Angelo Amante; Editing by Frank Jack Daniel)

By Crispian Balmer